INTERNATIONAL BUSINESS

INTERNATIONAL BUSINESS; Westerners See a Toothless Japanese Giant

By JOSEPH KAHN

Published: August 21, 1999

The proposed merger of three Japanese banks into a behemoth with $1.3 trillion in assets poses little competitive threat to American or European banks, bankers and analysts said yesterday, nor will it do much to disrupt the push by foreign banks into Japan's home market.

Combining Dai-Ichi Kangyo Bank, Fuji Bank and the Industrial Bank of Japan would create a powerhouse in assets alone -- not in global reach, profitability, technology or productivity. None of the banks is known abroad as an innovator. Facing loan losses at home, the three have been scaling back their international presence in recent years.

''Even if these banks consolidate their operations the way a U.S. bank would, which is not likely, they have pulled away from international markets, and a likelihood of a revived international push is low,'' said Diane Glossman, banking industry analyst at Lehman Brothers.

The subdued reaction to the planned merger contrasts sharply with the wariness toward Japanese banking power in the 1980's, when those banks financing corporate Japan's sweeping international expansion seemed poised to do to world banking rivals what Japanese electronics makers did to American television manufacturers. Even as recently as 1996, when the Bank of Tokyo merged with the Mitsubishi Bank to form what was then the world's largest bank in terms of assets, some rival bankers saw a rising competitive threat.

Japan's prolonged recession and troubled real estate loan portfolios have radically changed that image. Most foreign bankers say they are more concerned that a Japanese banking implosion might cause a world financial panic than they are about Japanese banks stealing customers from them.

''This is a purely defensive merger,'' said a senior executive at a leading American bank. ''They are trying to protect themselves at home.''

The banker said that none of the three banks were considered a sought-after partner for foreign banks. He also said that he did not expect the merger to curb the ability of foreign banks to lure customers away from Japanese banks.

Some American bankers view Japan's banking sector these days as handicapped, even crippled. The Japanese Government in recent years has continuously increased its estimate of bad loans. In February, the Government put the figure at 76 trillion yen ($600 billion), more than double a prevailing Japanese banking industry estimate.

All banks must set aside capital to cover failed loans, so every new yen in bad loans requires that almost that much be added to a loan reserve -- taking away money the banks might have been able to deploy profitably. For Japan in recent years, it has been a vicious cycle: several leading Japanese banks have flirted with falling below a widely accepted international standard for the amount of capital they have to support their loans, risking exclusion from international markets.

Most Japanese banks now promise that they will seek to reach American levels of profitability. But they have a long way to go. Some of the most profitable Japanese banks earn a 2 percent return on equity, a standard way of measuring profits, analysts say. Top American banks earn 5 to 10 times as much.

Measured by assets, many of the largest banks in the world are still Japanese -- though the recent combination of Deutsche Bank of Germany with the American company Bankers Trust made that the No. 1 contender. But sheer asset size does not really measure financial strength or sophistication.

Leading American banks now often serve corporate customers by helping them get access to stock and bond markets, rather than making loans and recording them on their books. Traditional ways of making and recording loans build assets quickly, but are not considered highly profitable. When American banks make corporate loans, they are often syndicated, or sold off to investors.

''You simply cannot equate asset size with financing power or skill sets,'' Ms. Glossman said. ''American banks would be much larger than the Japanese banks if they did things the same way.''

Chart: ''Assets of a Trillion-Dollar Institution'' Three Japanese banks will merge to form the world's largest financial institution. Dollar figures are in billions; figures are for the fiscal year ended March, except where noted. DAI-ICHI KANGYO BANK HISTORY Created by the merger of Dai-Ichi Bank and Nippon Kangyo Bank, it was the biggest bank in Japan before the 1996 merger of the Bank of Tokyo and Mitsubishi Bank. In 1997, the bank was engulfed in a scandal for paying off racketeers to avoid disruptions of its annual shareholder meetings. CHIEF EXECUTIVE: Katsuyuki Sugita YEAR ESTABLISHED: 1971 WORLD RANKING: 12th EMPLOYEES: 16,090 BRANCHES WORLDWIDE: 353 NET INCOME: -$3.16 MARKET CAPITALIZATION*: $28.24 TOTAL ASSETS: $455.9 NONPERFORMING ASSETS: $18.22 FUJI BANK HISTORY One of Japan's oldest banks. Its original name was Yasuda Bank, created as an expansion of a money-exchange business. The bank expanded in 1923 through the merger of 11 related banks, and changed its name to Fuji Bank in 1948. CHIEF EXECUTIVE: Yoshiro Yamamoto YEAR ESTABLISHED: 1880 WORLD RANKING: 20th EMPLOYEES: 13,976 BRANCHES WORLDWIDE: 303 NET INCOME: -$3.31 MARKET CAPITALIZATION*: $32.19 TOTAL ASSETS: $481.2 NONPERFORMING ASSETS: $11.45 INDUSTRIAL BANK OF JAPAN HISTORY The last major provider of long-term loans to Japanese companies after its rivals, the Long-Term Credit Bank of Japan and Nippon Credit Bank, became insolvent. The bank is a leader in the securities business, including underwriting of public and corporate bonds. CHIEF EXECUTIVE: Masao Nishimura YEAR ESTABLISHED: 1902 WORLD RANKING: 23d EMPLOYEES: 4,752 BRANCHES WORLDWIDE: 48 NET INCOME: -$1.65 MARKET CAPITALIZATION*: $25.66 TOTAL ASSETS: $383.4 NONPERFORMING ASSETS: $17.59 *As of yesterday. (Source: American Banker, Bloomberg Financial Markets)